By IndiaHub 
As a result, the tax department issued him a notice, and eventually, the tax officer slapped a penalty of Rs 2.48 crore on him.
Rao decided to contest this, first in CIT (A) and later in the Income Tax Appellate tribunal (ITAT) Hyderabad. On November 19, 2025, he won the case in ITAT Hyderabad. Advocate H Srinivasulu represented him.
Read the story to find out how Rao battled this issue and why ITAT Hyderabad ruled in his favour.
Brief facts
The key details of the case are that Mr. Rao is a non-resident individual who filed his income tax return (ITR) for Assessment Year 2020-21 on December 2, 2020, declaring a total income of about Rs 5.2 crore, which included capital gains of approximately Rs 4.781 crore and income from other sources of about Rs 42.616 lakh.
Out of the total capital gains, Rao had reported Rs 3.226 crore from surrendering three Equity Plus Fund issued by Bajaj Allianz Life Insurance. Rao had bought these three Bajaj Equity Plus Funds for Rs 25 lakh each on November 28, 2004, March 28, 2005 and January 22, 2006, respectively.
Subsequently his case was selected for complete scrutiny, and statutory notices under Section 143(2) and 142(1) of the Income Tax Act,1961 were issued to him.
Summary of the judgement
Chartered Accountant (Dr.) Suresh Surana said to ET Wealth Online: In the given case (no. ITA No. 1494/ Hyd/ 2025), the assessee’s, a non-resident individual’s ITR for Assessment Year 2020–21 was selected for scrutiny. The assessee had declared income comprising capital gains and income from other sources. In particular, an amount of Rs 3.22 crore arising on surrender/redemption of units of the Bajaj Equity Plus Fund was disclosed in the return under the head “Capital Gains.”
During assessment, the Assessing Officer (AO) took the view that the said income was taxable under the head “Income from Other Sources” and not as capital gains. While accepting the quantum of income disclosed, the AO initiated and levied penalty under section 270A of the Income-tax Act, 1961, treating the case as one of “misreporting of income” on the ground that the assessee had offered the income under an incorrect head.
The Commissioner (Appeals) upheld the penalty, following which the assessee carried the matter in appeal before the Hyderabad Bench of the ITAT.
According to Surana, the Hyderabad ITAT allowed the assessee’s appeal and deleted the penalty, holding that mere reporting of income under an incorrect head, without any suppression or misrepresentation of facts, does not amount to misreporting within the meaning of section 270A.
Surana says: “On facts, the Tribunal noted that the assessee had fully and truly disclosed the income from surrender of the Bajaj Equity Plus Fund in the return of income and in the computation statement. The dispute was confined only to the head of taxation, i.e., whether the income was assessable as “Capital Gains” or as “Income from Other Sources.”
According to Surana, the Tribunal emphasised that section 270A(9) exhaustively lists circumstances constituting misreporting of income such as misrepresentation, suppression of facts, or failure to record income and a bona fide difference on the correct head of income does not fall within those clauses.
Surana says: “Relying on judicial precedents, including the principle that penalty cannot be levied merely because the Assessing Officer changes the head of income, the ITAT held that the assessee’s conduct did not attract penalty provisions.”
Accordingly, since there was no concealment, suppression, or false claim, and the income itself was duly offered to tax, the levy of penalty under section 270A was held to be unsustainable and was directed to be deleted.
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ITAT Hyderabad analyses the facts
ITAT Hyderabad said in its judgement (ITA No.1494/Hyd/2025) dated November 19, 2025 that after going through the computation of income sheet prepared by Rao, they found that he reported income of Rs 3,22,68,672 with regard to surrender of the Bajaj Equity Plus Fund in his ITR.
Rao’s advocate had argued that there is no case of misreporting under Section 270A (9). He submitted that Rao had disclosed all facts fully and truly in his ITR. Rao’s advocate has also submitted that Rao was under a bonafide belief and had offered the income under the head of capital gain. However, the tax assessing officer made it taxable under the head of income from other source. As such, there is no misrepresentation or suppression of facts on Rao’s part.
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Hence, Rao’s advocate submitted that Rao’s case does not fall under any of the clauses (a) to (f) of Section 270A (9) and the penalty levied by the tax officer is liable to be deleted.
ITAT Hyderabad said that in this regard, on perusal of the computation of income sheet, they find that the assessee (Rao) has offered income of Rs 3,22,68,672 with regard to surrender of the Bajaj Equity Plus Fund in his return of income.
ITAT Hyderabad said: “Hence we are of the considered view that the assessee has disclosed all facts fully and truly in his return of income.”
ITAT Hyderabad answers if 270A penalty should be imposed on ITR reporting error cases
ITAT Hyderabad said that the only issue left for their consideration is that where the assessee (Rao) has offered an income under the head of capital gain instead of under the head of income from other sources, whether the penalty of misreporting under section 270A (9) of the Act can be levied on the assessee or not.
In this context, ITAT Hyderabad said that it is crucial to go through the provisions of Section 270A(9) of the Act dealing with the penalty in the case of misreporting of income, which is to the following effect :
Section 270A(9) in The Income Tax Act, 1961 (9)The cases of misreporting of income referred to in subsection (8) shall be the following, namely:— (a)misrepresentation or suppression of facts;(b)failure to record investments in the books of account;(c)claim of expenditure not substantiated by any evidence;(d)recording of any false entry in the books of account;(e)failure to record any receipt in books of account having a bearing on total income; and(f)failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.”
ITAT Hyderabad said that on perusal of above, it is evident that for levy of penalty under Section 270A(9), the case of the assessee (Rao) must fall under one of the clauses (a) to (f) of the said sub-Section.
In the present case, the assessee (Rao) has duly offered the income arising on transfer of Bajaj Equity Plus Fund in the return of income.
The ITAT Hyderabad said that the only issue involved is that the assessee has offered the said income under an incorrect head, i.e., under the head “Capital Gains” instead of under the head “Income from Other Sources.”
ITAT Hyderabad said: “In our considered view, as the assessee (Rao) has disclosed the income in the return of income, there is no misrepresentation or suppression of facts on the part of the assessee. Consequently, the assessee’s case does not fall under any of the clauses (a) to (f) of section 270A(9).”
ITAT Hyderabad said that this situation is merely one of wrong reporting of the income under an incorrect head, and nothing more.
Judicial precedent of ITAT Mumbai referred by ITAT Hyderabad
ITAT Hyderabad said that they have gone through the para nos. 10 & 11 of the decision of the Co-ordinate Bench of the ITAT, Mumbai, in the case of D.C. Polyester Ltd vs DCIT (supra), relied upon by the assessee, which is to the following effect:
● “10. We heard rival contentions and perused the record. We notice that section 270A of the Act uses the expression “the Assessing Officer ‘may direct”. Hence there is merit in the contention of the assessee that levying of penalty is not automatic and discretion is given to the Assessing Officer not to initiate penalty proceedings under section 270A of the Act. From the facts discussed earlier, it can be noticed that the addition came to be made on account of change in the head of income for assessing the rental income.
● We noticed that the assessee had offered rental income under the head “Income from House Property,” but the assessing officer has assessed the same under the head “Income from business.” The standard deduction @ 30% allowable u/s 24(a) while computing income under the head Income from house property will not be available when it is assessed under the Income from business.
● Thus, it is not a case that the assessee has suppressed or under reported any income. The addition came to be made to the total income returned by the assessee, due to change in the head of income, i.e., the addition has arisen on account of computational methodology prescribed in the Act.
● In our view, this kind of addition will not give rise to under reporting of income. Accordingly, we are of the view that the AO should have exercised his discretion not to initiate penalty proceedings u/s 270A of the Act in the facts and circumstances of the case.
● 11. As submitted by Ld A.R that sub. Sec. (2) of sec. 270A lists out the instances which are considered to be “under reporting” of income and clause (g) of it covers the case, when loss is converted into income.
● However, subsection (6) of section 270A lists out exceptions to sub. Sec (2), i.e., the instances which will not be considered as cases of ‘under reporting’ of income. Clause (a) of sub. Sec. (6) specifically states that the amount of income in respect of which the assessee offers an explanation and the Assessing Officer is satisfied that the explanation is bonafide and the assessee has disclosed all material facts to substantiate explanation so offered will not be considered as under reporting of income.
● In the instant case, as noticed earlier, the assessee has not under reported any income. The addition has arisen on account of change in head of income. We notice that the assessee has offered an explanation as to why it reported the rental income under the head Income from House property and the said explanation is not found to be false.
● Accordingly, we are of the view that the case of the assessee is covered by clause (a) of sub.sec. (6) of sec. 270A of the Act. We notice that the Chennai bench of Tribunal has held in the case of S Saroja (supra) that bonafide mistake committed while computing total income, the penalty u/s 270A of the Act should not be levied.”
ITAT Hyderabad said that after referring to this ITAT Mumbai judgement, they found that in that case also, the taxpayer had offered income under the head “Income from House Property” instead of under the correct head “Profits and Gains of Business or Profession.”
The ITAT Mumbai in that case held that the penalty under section 270A cannot be levied merely because of a change of head of income.
ITAT Hyderabad said: “Hence, respectfully following the same, under the present facts and circumstances of the case, we are of the considered view that no penalty can be levied under section 270A(9) in the case of the assessee.”
ITAT Hyderabad judgement
ITAT Hyderabad said:
● We direct the Ld. AO to delete the penalty.
● Since we have decided the issue in favour of the assessee on merit, other alternative arguments of the assessee on merits and the legal grounds challenging the validity of the impugned order are rendered academic and are not adjudicated.
● In the result, the appeal of the assessee is allowed. Order pronounced in the Open Court on 19th November, 2025.